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GameStop's Turnaround Plan Shouldn't Impress Investors

By Leo Sun – Sep 12, 2019 at 9:37AM

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The struggling video game retailer’s “Reboot” plans are filled with vague promises and unrealistic expectations.

GameStop's (GME 8.75%) stock recently plunged after the video game retailer posted a big second-quarter miss. Its revenue fell 14% annually to $1.3 billion, missing estimates by $50 million, and its comparable-store sales declined 12%.

Sales dropped across all of its product categories except for collectibles, which rose 21% annually but only accounted for 13% of the company's top line. Sales of new video game hardware plunged 41% as it sold fewer consoles, sales of new video game software slipped 5% due to a lack of big game releases, and pre-owned product sales tumbled 17% with fewer trade-ins.

Sales of accessories, previously lifted by surging demand for gaming headsets, fell 9%. GameStop's digital revenue, which only accounted for 3% of its top line, fell 10%, indicating that it couldn't keep pace with first-party digital distribution platforms like Sony's (SONY 3.14%) PlayStation Store.

A group of friends playing a video game.

Image source: Getty Images.

Gross profits fell across all of its segments except for collectibles, and GameStop's adjusted net loss widened from $10 million to $32 million, or $0.32 per share, missing expectations by a dime. For the full year, the company expects comps fall in the "low teens," and for its adjusted EPS to plunge 52%-57%.

Those numbers were dismal.

Unfortunately, the company's "GameStop Reboot" turnaround plan is also dismal, filled with vague promises and unrealistic expectations. Let's examine the four pillars of that strategy, and why they shouldn't impress investors.

1. Optimize the core

GameStop claims that it can "optimize" its core business by improving its operating efficiencies, optimizing its inventories, growing higher-margin product categories, and "rationalizing" its global store base. In other words, it wants to cut costs and reduce its global base of over 5,700 stores.

During the conference call, CFO Jim Bell stated that GameStop already closed 195 stores over the past year, that it was "on track to close between 180 and 200 underperforming stores globally by the end of this fiscal year," and that a "much larger tranche of closures" would occur over the next two years.

That's not a turnaround strategy -- it's what desperate brick-and-mortar retailers do to boost their earnings as their revenues fall off a cliff.

2. Become a "social and cultural hub for gaming"

GameStop faces two long-term headwinds: sluggish mall traffic and the rise of digital downloads. It believes that it can counter those challenges by turning its stores into "the social and cultural hub of gaming." It says it will do this by improving its stores, expanding its PowerUp Rewards loyalty program, training more "knowledgeable associates," and testing esports-oriented stores that encourage customers to play games together.

Those strategies don't address the fact that more customers are ordering consoles online and downloading games from digital storefronts. Visiting GameStop's stores might be fun for a niche of enthusiasts looking for discussions about hidden gems, but it likely won't convince the majority of gamers to go to the mall.

A couple checks out a video game at a video game store.

Image source: Getty Images.

3. Build a digital platform

GameStop recently relaunched its main website to improve its omnichannel capabilities, and CEO George Sherman stated that the new platform marked "an important step" toward its "long-term goal" of generating $1 billion in annual e-commerce revenue, which equals about 14% of its projected revenue next year. However, other struggling brick-and-mortar retailers made similar promises before, and only a handful of larger retailers -- like Walmart and Target -- have pulled it off.

Sherman also stated that GameStop could leverage its existing assets to "create digital exclusives" for customers. Sherman didn't disclose any other details, but it would be tough for GameStop -- which Sony, Microsoft (MSFT 3.38%), and other big publishers are cutting out of the retail loop -- to convince those companies to launch "exclusive" bundles for GameStop.

Sherman's vision also ignores two recent developments: Microsoft launched a cheaper disc-free Xbox One earlier this year, and Sony stopped GameStop and other retailers from selling PS4 download codes.

Moreover, the rise of newer digital platforms -- including subscription-based unlimited downloads (like Microsoft's Xbox Game Pass) and cloud gaming platforms (like Sony's PS Now) -- will further widen the gap between game publishers and brick-and-mortar retailers.

4. Transform vendor partnerships

Lastly, GameStop believes that it can "transform vendor and partner partnerships" to "unlock additional high-margin revenue streams." It didn't provide any specific examples, but GameStop suggested that it would work with those companies to sell more "exclusive" digital and physical products -- like games and collectibles -- at its stores.

That strategy would have made sense during GameStop's heyday in the 1990s. Unfortunately, GameStop is no longer a crucial hub for video game sales, so it probably won't have much clout in negotiating new partnerships.

The bottom line

I told investors to give up on GameStop earlier this year, and I'm sticking to my guns. Sony and Microsoft's new console launches might temporarily boost its sales next year, but they won't resolve its long-term challenges -- so investors should stick with better-run companies instead.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool owns shares of GameStop and has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

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